The Treasury’s actions under the Emergency Economic Stabilization Act, taken with other rescue measures, may help prevent the current financial crisis from triggering a 1930’s style financial and economic meltdown, according to the Financial Stability Oversight Board. “The actions taken by Treasury under the EESA provided critical support to the financial system during a period of market turbulence and weakening economic conditions,” says the Board in its quarterly report to Congress. Actions taken under the stabilization program improved conditions in short-term funding markets and likely imparted positive effects on bank and nonbank lending activity, says the Board.  Meanwhile, activity by the Treasury under the Troubled Asset Relief Program (TARP), together with those taken by the Federal Reserve, also aided the housing market, the board explained, relieving strains in the functioning of credit markets and contributing to lower interest rates on residential mortgages. Under EESA, capital positions at larger bank holding companies rose significantly during the fourth quarter – despite operating losses at some of the major banks – largely because the capital injections made under the CPP and TIP, says the Board. However, the Board warns the magnitude of the Treasury’s benefit to the economy is difficult to single out in light of the presence of other government programs and the broader weakness in  U.S. and global economic activity. “Especially at this still-early stage, there remain significant conceptual and practical challenges to identifying the effect of Treasury’s actions in isolation on financial markets,” read the report. Foremost among these challenges, says the board, are the difficulties in disentangling the relative importance of reduced demand for credit due to weaker economic activity, reduced supply of credit because borrowers appear less creditworthy, or reduced supply of credit because lenders face pressures that restrain them from extending credit, such as possible concerns about their capital. The Oversight Board is generally praiseworthy of the EESA and believes the Treasury should continue to use its TARP authority to stabilize financial markets, help strengthen financial institutions, improve the functioning of the credit markets and address systemic risks. Write to Kelly Curran at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.

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